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The Government of Canada Just Pointed Out The Mortgage Market Might Be A Cesspool

Bank executives are all of a sudden very vocal about foreign buyers. Strange timing, since a branch of the Government of Canada quietly dropped a report expressing concerns regarding the Big Six last week. The Financial Consumer Agency of Canada (FCAC), the division in charge of protecting consumers from predatory conduct, released a 26 page report on domestic bank practices. The organization found that retail banking culture encourages employees to sell products, with little regard for the consumer. Even worse, they found that banks don’t have adequate measures in place to “monitor, identify and mitigate these risks.” It’s kind of a big deal, especially when you dig through the mortgage sections.

Disclaimer

First off, the FCAC is not addressing any alleged breaches of market conduct. If there were any, they have to be proven by a seperate “track” of the FCAC, and they’ll enforce if required. The findings in the report represent observations, that provide an opportunity to present a problem. The FCAC wants to ensure you don’t think any specific banks are guilty of anything, although they never mention any banks by name… so you couldn’t identify them if you wanted to. You know, they’re just laying down a standard innocent until proven guilty intro. The kind you would hear before any Dick Wolf legal drama. Dun Dun.

Market Controls Are Insufficient At The Big Six

The report concludes that the Big Six banks are focusing on selling products, and incentivising employees to do so. The result is bank branches are now “stores,” dedicated to prioritizing sales over consumer interests. A sophisticated system has developed to reward employees for these sales, both financially and non-financially, potentially at the expense of the consumer. FCAC is also worried that the banking controls haven’t kept up with the change in the retail banking model, making them “insufficient” and prone to “mis-selling.”

For those that need a bureaucrat-to-English translation, they’re basically saying incentive to sell was greater than protecting consumers. While this is mildly annoying when it’s a credit card, or over priced chequing account, it has the potential to do some serious damage when it happens in what the FCAC calls “higher risk sales channels, practices and products.” Things like mortgages fall into this category, and make up a good chunk of the report. In particular, mobile mortgage specialists.

Mobile Mortgage Specialists and Variable Pay Models

Have you noticed an explosion in commercials, where the bank offers to send a mortgage specialist to pretty much anywhere you want to meet? These are called Mobile Mortgage Specialists (MMS), and according to FCAC, some banks “sell upwards of 90 percent of their mortgages through this channel.” Regulators found that all of the Big Six offer this service, and all use a 100-percent variable pay model.

A 100-percent variable pay model means the mortgage specialist only makes an income, if you borrow from them. For example, if the commission offered was 85 basis points, closing a million dollar mortgage lands a commission of $8,500. Some banks also up the commission if you sell past your target. You make no money if you don’t close a mortgage. You make mad cash for closing the largest mortgages you can, as quickly as possible. What could go wrong?

A lot. FCAC believes the current mobile mortgage model discourages these specialists from making “reasonable efforts” to assess consumer needs and financial goals. Selling products with higher commissions, larger mortgages than needed, or pushing to buy sooner “rather than encouraging a larger down payment” are all problems noted with the model. Specialists are motivated and incentivized to sell mortgages that yield higher commissions. You’re probably thinking, good thing banks have supervisors, right?

It’s Difficult To Enforce Appropriate Conduct

Turns out when mortgage specialists are meeting you at Starbucks or the Brass Rail, it’s difficult to supervise their conduct. According to the FCAC, “they [MMS] are expected to spend their time in the community developing business relationships with real estate agents, developers and others from whom they can earn mortgage referrals. This limits opportunities for direct supervision, observation of sales practices and coaching by managers.”

Let’s gloss over the fact that banks expect mortgage specialists to chill with other people who are also incentivised by maximizing consumer debt loads. Instead, let’s focus on the little opportunity for supervisors to monitor practices. The only way they would know anything was wrong is by consumer complaints, and default rates. Few people complain when they’re making money, so both are scarce while prices are rising. Default rates are always low during an up cycle as well, even when the buyer can no longer afford the home. These types of specialists haven’t been around long enough to witness a market down cycle.

Investigating poor conduct is also tricky, since these specialists are in high demand between the Big Six. FCAC notes, “The competitive market for the services of high-performing MMS can make it more difficult for banks to enforce codes of conduct and take disciplinary action.”

Did that just sound like they pick up and leave when a bank looks into them? Maybe we just misunderstood that statement, let’s dive deeper. According to the FCAC, “during the review, FCAC learned there have been cases of MMS leaving their employer before the bank could complete its investigation or take disciplinary action.” I guess we understood fine. Sounds like there have been investigations that end, just because the employee goes to work on the other side of Bay Street.

Canadian banks might be ticking all of the boxes, and vetting clients and offering the perfect product at the right time. They might be ensuring that consumer needs, and best interests are adequately taken care of. Or they might not. As the FCAC has pointed out, the current model, has inadequate measures to even monitor the issue. Claiming that all of these deals are adequately vetted is a guess at best.

Sorry to interrupt the narrative being crafted by bank executives right now. Let’s go back to them, and hear what they were saying. The correction is over, and foreign buyers are the biggest problem? We’re not talking about mobile mortgage specialists? Cool story, bros.

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The reason they meet you wherever is a sales technique, so the borrower feels comfortable. This gives you a false sense of control, but make no mistake, if you’re borrowing a million dollars, you are in no way running that situation.

I wonder if mobiles mortgage specialists are a new thing borne out of the market run up. We were so drunk on cheap money lenders would let you sit on your couch and take out a million dollar mortgage… Sounds perverse.

Similar to the US circa 2008 as the wheels start to fall off all of the factors start to bubble to the top and you wonder how it got so ducked up. We just read about buyers holding properties VS selling to ensure they can close…honestly until I read the BD post I assumed a small percentage did this not enough for a Damnit star article and website. Now more questionable mortgage practices are in the chatter. I’ll say it again I think our subprime will be the community/alt lending… We will find out they were packaged and sold to the banks somehow and now everyone is exposed…and side note, check out the globe cover, all the new ‘landlords’ can’t cover expenses,shocker…

I’m guessing the biggest culprit will turn out to be CIBC. It’s known that they are the most exposed to res RE as a percentage of their business but it goes deeper than that. While you will get warnings from bank execs at BMO like Doug Porter, the “experts” at CIBC are like Benjamin Tal are always on the record mimicking RE interest groups. “Just a slowdown, maybe could dip a bit further but most of the needed correction had happened, we still have a supply issue”. Then as BD reported a few weeks ago, they had just ended their 35% down no questions asked to foreigner loans………. I am also suspicious of RBC

In 2008 the banks pumped lies until the very end… Why? Because they can make money on the way up and down but not if there is too much panic. They need time to unwind here and bulk up there. CIBC changing their foreign lending standards, Scotia beefing up their foreign buyer requirements and other such actions suggest they are reducing risk in advance of a bigger problem.

Ten years ago the US banks were playing the everything is ok game while they tried to sell off their exposure to CDOs while loading up on the swaps. Guess you can’t be surprised when the dog acts like a dog.

Just hate that it’s heads they win, tails we lose…….. and if they lose then we just really lose more

Yah, those investors have such deep pockets that 30% of them are forced to pay 6% or more in interest, and 16% of them are paying more than 9%. That’s what the Financial Post article on the same survey says.

Sorry, but if the lender is charging you 6% (let alone 9%!) when most mortgages are going for2.5% – 3.5%, you aren’t Mr. Deep Pockets. More like Mr. Deep Throat, cuz that’s what you probably needed to do to get the loan.

RBC’s new survey is full of optimism. The kids will be roaring back into the market any day now. The correction is over. Mom and Dad will be gifting down payments like never before. Even Garth Turner has bought into the narrative of a brief correction. He’s telling his disciples to buy now if they want a house, because “conditions are changing”. He might be right. But all the metrics are still really ugly. Price-rent metrics compared to the US are brutal. Price-income ratios are even worse. Is it really possible that Canada can maintain drastically higher home prices than the US on a permanent basis?

No kidding. He was imploring people to avoid the housing market back in 2008 when houses were 1/3 the price. Of course he denies saying any such thing now, claiming he only preached balance and diversity and not buying more house than you can afford. True, he did preach that, when he wasn’t predicting disaster for home buyers. Those who bought in 2008-12 are glad they didn’t listen to him. I’m betting that in five years time, those who DIDN’T buy in 2018 will also be glad they didn’t listen to him. And we likely won’t have to wait that long.

Garth is a charlatan giving the worst advice on real estate imaginable. It’s immoral for him to be telling people that now is the time to buy. You’re right that his entire record on the real estate market has been at odds with reality. What most people don’t know is that while Garth was bearish on the market, he was buying and flipping multi-million dollars houses (he’s a big real estate investor despite ever advertising it like he does stocks). He’s probably trying to dump several properties now in what he sees as a window to get rid of it before holding the bag, and so he’s supporting the narrative of a short correction and for people to buy. Disgusting.

Blue. I am very bearish but considering the condo market it is clear that there is demand…. out there that is dormant. People are not rational…. it took me a couple of years to reconcile to this idea. that no matter what… if it can fit on their budget ( monthly, no risk assessment, no forward looking analysis) they will buy. The current correction in my opinion ( and it is an opinion as no one can really tell what will happen) is mainly due to the insane peak we had last year, Q1.

I’m not a financial advisor my friend, it isn’t my job to convince someone water is wet or the sky is blue. If you think the current RE narrative is rock solid and asset appreciation is the only option for city condos then buy. Buy two. To infinity and beyond. BD4L.

Condos are reaching the same parabolic height now that detached dwellings did one year ago. I agree people are irrational, and that has inflated this bubble way past what I imagined was possible. But that will just make the bust bigger and longer. Maybe this correction (in detached) really is just a head fake, and we’ll see another few years of madness. But I doubt it. Irrationality alone can drive a market for a long time, but not forever.

Agree with every point. Honestly I think we hit the peak in terms of exuberance in 2017…I remember a condemned shack in Leslieville going for half a million. Oakville starter homes in the over a million…

Andre, let me walk that back a bit… Didn’t mean to be so aggressive and you’ve improved from your previous post… In a housing run up SFH see the most demand. Condos are only at these levels because the money changed horses once yields on detached dropped. Also Toronto is not Manhattan you can live 15 minutes outside the core in a detached house. The condo market is just another bubble driven by cheap money. If you believe in the fundamentals they shall set you free.

It is all good. It is very difficult to have a conversation/dialogue using comments. I agree with your comment that fundamentals (real wages gains x inflation x interest rates .. ) should be the drivers of RE prices. I make my personal decisions based on them but most people don’t behave/act based on the same principles (it took me a long time to realize how irrationally people can behave ). That article posted here yesterday is such a good example of how greed, fear and entitlement are the drivers behind the seat. They are not unsophisticated individuals (CA/CPA, Engineers….) they should know better. Expose, as so dramatically described by them, their entire life saving to a downturn!! To me this RE fire will only really be put out by interest rates increases. The B 20 should force a correction (my best guess 10 – 15%) on pre 2017 peak prices… I cannot understand the rational of people buying condos in the current market….they have to be first time home buyers suffering from FOMO in an increase interest rate environment and priced out of the SFH market. Majority has to be buying on maximum borrowing limits and using ALL savings they have. They will be underwater soon.

People have crazy expectations … nearly 2/3 of boomers say they plan to downsize, for many it’s a retirement plan. But with the huge compression in the market the difference in cost and availability between a traditional family home and a decent smaller house/condo/rental is making that problematic. After commissions, fees, taxes, outstanding mortgage, loans, condo fees, etc. you can easily wind in a s place, and not be significantly better off financially. It seems this disconnect can only get worse because millennials s can’t even afford a condos or starter homes, much less take on a over-renovated sinking battleships. There are huge financial, social and demographic issues and problems at work in this bubble that were almost non-existent in 1989, and are likely to make the correction this time around correspondingly more severe.

I don’t think he was telling anyone to speculate or that prices will start rocketing higher. I think his point is that he doesn’t foresee massive declines of 50+ in specific areas or a 30% decline in the gta average as a whole. He thinks economy is too strong and that millennial demand will put a floor on prices. Also with rates going up even if prices dont rise it could become more unaffordable. You probably could go into a place like Richmond hill right now which has already seen a 30% drop, find a panicked seller and get something for 35-40 below peak………..

While this strategy might be ok if you are someone who absolutely has to buy in the next year or two…….. I strongly disagree with Garth.

I think he seriously underestimates how much of our economy is tied to persistant housing price appreciation, and even if the US economy takes off (which usually helps Ontario) I don’t think it will be enough to overcome a changing credit cycle

Gus, the problem is that US is in deep sh*t too, though it’s not as deep is Canada. Everything looks good at the moment(employment, growth, etc) but: – US will keep increasing interest rates which will show down economy. – They are selling Federal Reserve assets (bonds) to unwind their QA actions which will bring bond prices down (yields will go up) – Trade war they started with China may plunge stock market (last time it plunged about 50% during last US trade war). – Yield curve is flattening every day which is the most reliable predictor of recessions so far.

Therefore it’s pretty realistic to expect that even if Canada’s housing market will survive in a slowdown mode for a couple of years it should be hammered by the upcoming US recession. Pessimistic scenario would be for Canada to fall into our recession first and then be additionally affected by US recession which sounds pretty scary and real at the same time.

I agree with you. Just replying to Alistair’s comment about Garth Turner over at the greaterfool.ca who has recently switched to I guess being more bullish on Canadian real estate.

One thing I have been investigating that could lead me to being more bullish on the US however is a theory that the new tax cuts could result in a ton of global US companies bringing a lot of their capital back to the US and putting it to work, as some may see the recent cuts as a once in a generation opportunity to bring capital back home. Read an article specifically about how Apple has like half a billion dollars sitting idle in Ireland. Whether or not such companies actually bring their money back at a lower rate and put that to work is a whole another question. I have not made any investments based on this but something I am keeping an eye on.

That should definitely boost economy along with the massive tax cut itself. The cost for this growth is $1.3T deficit for 2018 alone. There is no question it’s completely unsustainable. I agree, it’s definitely worth monitoring since everything can change at any moment. If US will cut back interest rate and launch new QE no recession will happen, however the way everything is evolving right now most likely leads to recession and flattening yield curve is the biggest proof for that. Time will tell

The premise would be that such companies suddenly “find” a bunch of oversees profits. Those surprise profits would still be subject to the new tax rate and thus the US might get a big surprise when it comes to tax collection. Not arguing that this is sustainable, if there is merit to it I just think it could push back the day the US faces a reckoning. I don’t fully understand the play either or it’s pottential, something I just started looking at. Garth argued US economy should keep us going. I don’t think it would be enough to save Canada even if it does just could be our best hope of having the fallout mitigated.

As a long time reader of the Greater Fool blog, I have learned that one must carefully parse every word of Garth’s posts. This past week, he didn’t suddenly become a bull on Canadian real estate; instead, he noted that those waiting for 50+% drops in detached housing in GTA or YVR would be disappointed. He did say if one were contemplating buying SFD in GTA, and could afford it, (following his “rule of 90”), now is the opportunity to “vultch”, and offered some strategies on how best to do this.

After an outcry from readers claiming he’d changed his stripes from bear to bull overnight, Turner clarified that he didn’t think the correction in YVR was over, but had barely begun, as effects from the new NDP taxes, along with continued rising rates had yet to be felt.

Garth did unequivocally state that everyone should stay away from condos, as they are the frothiest, riskiest sector of the entire Candian RE market. IMO, condos on the outskirts of Metro Van, such as Maple Ridge, could potentially lose more than 50%, perhaps even up to 70%, once the bottom falls out of the market. Speccers and flippers will rush to the exits, and for sale signs will litter the landscape…

Who would voluntarily fill out such a survey? Someone who was already interested in buying a place, that’s who. If you have no interest in the housing market, you’re not going to have any interest participating in a survey about the housing market. The results are almost certainly a pile of donkey dung.

Absolutely. And intention to buy doesn’t mean ability to buy. Survey also points out that many didn’t even know about B20, and expect their parents to help them out.

My take away was that a bunch of young millenials who have no idea what’s going on in the market still think buying a home is a great idea and think they will be able to do so because their parents who are rich because they own homes will help them get in.

A cesspool. Sigh. I guess we should have expected this. Gullible purchasers can’t get into a mess like this all by themselves, it also requires a conducive environment and a legions of clueless /deeply corrupt facilitators.

A screw up this big can’t be organized by a few over exuberant people. It requires institutional sized screw ups, and awareness. This person’s tweet with an OSFI observation from half a decade ago shows they damn well knew what was happening, and facilitated it.

David Dodge is also coming out and saying the BoC should have raised rates sooner and higher. It’s rare for a former BoC governor to criticize his successors. Dodge is no dummy. He must have pretty strong feelings on the subject and pretty good reasons for saying them out loud.

There is no real “soaring demand”! It’s mostly broke “investors” trying to make easy money. Party over, there is no money to make now, just losses. Panic selling will start soon as prices catipulate with reality.

Yes and the report came from CIBC and Urbanation………… two groups that could never have a bias to positive RE news. I’m actually surprised they even released this. Guess it’s so they can point to something a year from now to imply the somewhat warned us?

Also while we are on that point. In that star article the other day about Mattamy home owners in Oakville. Mattamy owner states that at the time those buyers made their purchase there were warnings in the media that it could be a bubble. Then there is a link to a Star article from feb 2017. While they do have bubble in the title and quote Doug Porter of BMO saying it’s a bubble, they follow it up with three other people giving quotes that imply it will keep going up.

His source is the article. 30% are paying south of 6% interest! That means almost 1/3 are sub-prime borrowers. (Prime borrowers would not be paying more than 4.0%. If you’re not a prime borrower, you’re sub-prime.). Almost half are losing money monthly after mortgage & condo fees (no mention of property taxes and insurance so I assume those aren’t counted – if they are, then nearly all of them are losing money). 34.5% are losing more than $1000 per month.

The only “good news” is the prediction they make at the end that only 4% of the market will be affected if they all decide to sell. Sorry, but a comforting prediction that follows a wealth of frightening current stats is anything but comforting. Despite their attempt to put a positive spin on it, that report clearly indicates an unmitigated disaster unfolding in the condo market. Hope you’re enjoying the blow-off top, because it’s ending now, just like it did for detached last spring.

My condo cost me 350 dollar pre constitution when I bought in 2009 at harbour front. And yes I am enjoying my real estate cause it’s up by 350 percent in last 10 year. The 4 percent is significant because market will not crash as vast majority condo owners bought is in half price of what it is today. Some like m bought in one third of today’s market price! And what is with personal attack? Take it easy.

Mmr: “Half price of what it is today.” Check back in the fall, you’ll be able to say it again …. about then and now. The argument “so we’re losing a bit in the rent and tax department, but the asset gain makes up for it” … that you won’t be able to say.

What personal attack? If “hope you’re enjoying the blow-off top” is a personal attack, then the bar for describing something as a personal attack must be pretty low. I said the same thing last year about the detached market to many people. Was that a personal attack?

Well said AM. Also let’s keep in mind that this study was on completed condos last year. Means they were bought by imvestors in 2013-2014. The exuberance was much higher 2015-2017. I’m sure that percentage has increased.

4 percent is worst case scenario. Downtown condos people bought for 400 dollar square feet just few years ago now it’s 1000. How come it’s a bad investment? But yes if some one buying now for 1000 is making a very bad decision but that’s not my problem.

Mmr: >>Price has to be fall from 1000 dollar to 400 dollar even then maybe people will lose money. That’s like over 80 percent price correction.<<

1,000 to 400 is a decline of 60% Factoring in costs, taxes, rental losses, etc. a drop of less than 50% and you are underwater. which is what happened when the 1989 bubble popped. And this bubble is way worse.

If you buy 10 or 5 years ago you have no rent loss only thing you have is build up quite and actually massive positives cash flow. These down condos used to sell for 350 square feet. From 400 dollar to 1000 dollar is 250 Percent profit margin. Now please redo the math. None of the investors who bought before 2013 will go under unless as I said North Korea nuke us.

No I didn’t see you are right. 1989 interest rate was 18 percent now it’s 3.25. When the condo are selling for 300 dollar square feet only then we can have an argument real estate investment in Toronto was bad idea. Any thing more then that every investor is making money. People forget Toronto was dirt cheap it’s just most people did not realize it back then. Smart real estate investors who understand value of real Estate will never lose money because they will never touch any real estate in Toronto in last there year as it’s over valued.

If you bought in 2009, why would you still be hanging onto an asset that tripled in price? That makes no sense. Even if it’s cashflow positive because you bought at a much lower price, the cash flow cannot justify forgoing a realized capital gain of 300%. Wouldn’t it make more sense to sell, and then buy an income property in a region where the price-rent metrics were more favourable?

If I buy a stock with a 5% dividend, and it triples in price but the dividend goes up more slowly, I unload that sucker. I don’t care if the current 3% dividend is greater on a nominal cash flow basis than the 5% dividend on the original price paid. I make the decision to sell based on the dividend return vs. the current price. Because I can then use the proceeds of sale to buy another stock that pays 5%, thus improving my income. Why would condo investing be any different?

Alistair…I don’t sell because I can’t afford to buy any thing any more. Every thing is over valued by insane amounts. There are no place for professional land lord any more. We have ruined it. And invest where in stock market? It’s also too volatile because of nafta and trump. Only place I can think to invest is now at Ottawa. But prices here also increasing and by renting you can’t cover your expenses either.

Mmr, I mean buying in another location – not the GTA. Personally, I have been very tempted to buy an income property in New Brunswick, where the price-to-rent ratios are excellent. If I were sitting on a GTA property right now, I’d sell it, take the tax hit, and use the proceeds to buy two (yes, ‘2’) houses in Moncton or Fredericton or vicinity that each has a basement rental suite in it. Then I’d hire a property management firm to take care of them, seeing that I don’t live there (they take about 12% of rent, plus expenses). Even after the expense of paying a property management firm, they’re still cash-flow positive, and that’s assuming they are financed. If you were buying them for cash (presumably that’s what you’d be doing if you cashed out of the GTA), then you’re laughing all the way to the bank.

We can probably expect massive selloffs of condos being held by investors that are losing money, since it would make more sense for them to cash out with a 155% return on investment than rent for a loss. They’ve made a ton of money in appreciation but the only way to tap it is to sell. And selling is not a bad proposition because the market could very well stall or decline like the detached market by next year.

If you are interested in putting your money where your online posts are, there is a vehicle for you:

“The Fund

Investment Thesis Canada has one of the most overvalued housing markets in the world and the Canadian economy is over-reliant on debt growth and the housing market. Both supply and demand will begin working against the housing market in 2015

Investment Objective To provide Canadians with an avenue to mitigate their exposure to housing and its potentially negative impact on their livelihoods and savings

Investment Strategy To find investments that will benefit from a decline in Canadian house prices. We aim to find investments that earn an asymmetric payoff, suffering small losses when we are mistaken and large gains when we are correct See Offering Memorandum for full details.”

I am not an investment adviser and this is not investment advice. See a professional and read the full memorandum. I am just putting this out there as information, since the Spartan fund is not a widely known vehicle.

The latest monthly report shows they got killed in 2016 and 2017 (down over 50% each year!). But they are up almost 40% already YTD in 2018.

I don’t see why it would not work. Sounds like buying a naked PUT option (it’s like an insurance from price decline). You will loose little money when stock is going UP because your PUT will expire but if market tanks this PUT option will work you will earn a lot. I’m not an expert in investment but I’m pretty sure there are investments allowing you to loose little in 99% cases and win big in 1%. Overall it won’t make you reach but if you time it right it may.

I already have purchased puts on TD and CIBC, and am looking to buy some on XFN that expire in March 2020. I think that’s a better way of shorting than handing cash over to some hedge fund manager who will extract a hefty fee for doing the same thing.

I’m quite new to all that investment stuff so I don’t know much about it. I hate dealing with banks because they want huge margin for everything as well. I think they wanted $600 for 3months PUT option on $20,000 investment which is 3%. It will grow to 12% annually and no way it will give you 30% yield for just 1 month (which hedge fund was able to do this February). So definitely those guys use some more sophisticated strategies.

Anyway I don’t believe I can even work with them because they require all investors to be registered and I don’t qualify for that so if you can give me a hand on which PUT options you can recommend (strike price, duration) etc. I would really appreciate it. My email is alex.ontario (at) gmail.com.

P.S. in a matter of days Vancouver inventory grew from 5 to 6 months according to Zolo statistics and new regulation is not even implemented there. R.I.P. Vancouver housing market.

Their ‘small losses’ were 50% each year in 2016 and 2017 for a ‘small’ cumulative 75% loss if you held it over both years. Shows me they are likely using a decent strategy, because those were two terrible years to be short.